Force Motors (NSE:FORCEMOT) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Force Motors Limited (NSE:FORCEMOT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Force Motors

How Much Debt Does Force Motors Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Force Motors had ₹5.45b of debt, an increase on ₹2.93b, over one year. However, because it has a cash reserve of ₹195.9m, its net debt is less, at about ₹5.25b.

How Strong Is Force Motors' Balance Sheet?

The latest balance sheet data shows that Force Motors had liabilities of ₹8.49b due within a year, and liabilities of ₹3.84b falling due after that. On the other hand, it had cash of ₹195.9m and ₹2.17b worth of receivables due within a year. So its liabilities total ₹9.96b more than the combination of its cash and short-term receivables.

Force Motors has a market capitalization of ₹17.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Force Motors's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Force Motors made a loss at the EBIT level, and saw its revenue drop to ₹24b, which is a fall of 31%. To be frank that doesn't bode well.

Caveat Emptor

While Force Motors's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₹80m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹3.3b of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Force Motors you should be aware of, and 1 of them doesn't sit too well with us.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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